The Obvious Mistakes
Simple, yet profound. The longer I live and the (hopefully) wiser I become, the more I realize that most of the important concepts in life boil down to just a few simple ideas. Simple, yet very very important.
Ideas like, “Spend less than you make”, “Optimize for the common case” or “Invest for the long term by buying and holding”. These are exceedingly simple concepts… yet when they’re practiced for an entire lifetime these ideas can lead to incredible financial success.
Today I’d like to propose another simple yet profound idea. One that applies to many potential areas in life:
Succeeding in life isn’t so much about consistently making “winning moves” but it’s actually about avoiding the big blunders. The obvious mistakes.
Simple, right?
You’re probably thinking, “That’s way too simple. Successful people work really hard for all that success! Just avoiding missteps isn’t going to lead to success, right?”
On a certain level, you’re right. Hard work can lead to career success, but even successful people can get loaded-up on cocaine and drive their Ferrari into a cement wall at 120 mph. I don’t consider that a successful life by any means…
No, hard work and career success won’t necessarily keep you out of the obvious trip-ups in life. The mistakes I’m talking about can totally destroy a life:
- Drugs, cigarettes, and alcohol – Substance addiction is no joke. Illegal drugs are bad on a whole number of levels, but some drugs are legal and get abused all the time. Not only does this hurt your physical and mental health, but it hurts your pocketbook too!
- Eating poorly — Obviously eating a bunch of crap and gaining weight is terrible for your health. Once your health has deteriorated, it’s also very hard to get back into a healthy state. Putting good healthy food into your mouth should be an absolute ‘no brainer’.
- Not getting enough exercise — This one goes along with eating poorly. Humans are not meant to be sedentary. Sitting around and not getting any exercise is obviously going to be very bad for your long term health.
- Marrying the wrong spouse — Marrying the wrong person in life can cause a huge amount of mental pain and suffering. To make matters worse, if you get a divorce that can be a lot of financial pain too.
- Reckless Driving — Did you know that there are over 90 fatal car accidents per day in the United States? Every year over 2 million Americans are permanently injured in car accidents. With statistics like that, it’s obvious we need to be extremely careful when driving. Driving is one of the most dangerous things we do on a regular basis. Slow down and stay safe people.
- Keeping the wrong friends — It’s been said that people are the “average of the five people you spend the most time with”. It’s obvious that keeping good friends can make you a better person. Keeping bad friends might get you put in jail. Choose wisely, because who you call a friend matters.
- Over-spending — Getting into debt because you have a spending problem is clearly very bad news. Your financial health will suffer if your spending takes precedence over getting debt under control.
See what I mean? These are giant mistakes that can destroy (or severely cripple) a successful life no matter how much money you make. These mistakes are obvious, yet they trip up loads of people every day.
When my kids get old enough, I hope they can study this list and try to avoid the big mistakes. As a parent, I don’t need my kids to be super successful high earners. I could care less about how much money they make or how successful they are in their chosen career…
I just want them to grow up to be good people that steer clear of trouble and stay healthy.
Avoiding Obvious Mistakes When Investing
Avoiding the obvious mistakes has clear benefits when it comes to your lifestyle, but there’s also big benefits to this strategy when investing too.
To quote Charlie Munger, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
He’s absolutely right. You can make a ton of money just by investing in low/no fee index funds and not trying to be smart. There’s absolutely no need to be a genius to do decent as an investor. You can get decent returns without great intelligence. All you have to do is avoid making the really stupid mistakes — The mistakes that lead to a permanent loss of capital.
What are some of these obvious mistakes in investing?
Investing in high fee funds or funds with a load — This one has been repeated to death on the internet, but paying high fees is bad. Even today I see people still investing in high-fee funds or funds with a front-load, so this mistake bears further repeating.
Using leverage — While leverage can definitely boost investing returns, it can also destroy investors when things go the wrong way. Rarely is leverage worth the additional risk taken.
Investing in things you don’t understand — One of the biggest mistakes investors can make is investing in stocks, bond, or other investments they don’t really understand. For example, I have a friend that owns shares in Tesla and he’s never looked at a 10k or 10q. That’s a huge risk because he doesn’t understand the business. He just “drank the Tesla Kool-Aid” and thinks it’s a great investment.
Overly large dividend payout ratios — This is another obvious blunder I see repeated all the time. Investors “chase yield” and invest in companies with very high payout ratios. Then, along comes an “economic blip” (like a recession) that derails that high dividend paying company. Suddenly they don’t have enough cash to pay dividends. The company either ends up selling assets, cutting the dividend, or going deeper into debt to just to keep paying it. Any of those options is going to be a bad outcome for investors.
Trusting the wrong business partner — This mistake I see more frequently with small businesses owners or real estate investors. The cost of those businesses is quite high, so they often go into the investment with a partner. People don’t always agree about how to run a business however, and partnerships can go bad. Things can go south pretty quickly if you put your trust in the wrong person. Be careful who you do business with.
Investing in industries undergoing rapid change — Obviously investing in a dying industry isn’t a very good idea. Malls and retail stores are a perfect example of this right now. We know people are spending less and less time in malls and doing more shopping online, but people still try to invest in these things. There can be times when it works out, but more often than not “turnarounds just don’t turn around”.
Chasing Momentum / Chasing Growth — Here’s a blunder that doesn’t get nearly enough criticism, because it’s a little less obvious. Investors try to buy into hot stocks or fast growing businesses, hoping to catch some of that sweet out-performance. What they forget is that business return is a product of the price you pay, and fast growing stocks sell at huge premiums. When investors put money into these stocks, what they’re really doing is investing in “The Great Fool Theory“. In other words, they’re hoping a greater fool will come along and pay more than they did.
The Biggest Mistake To Make
There’s plenty of mistakes to make in life, but probably the biggest mistake you can possibly make is not learning from your mistakes — repeating the same blunder over and over. Learning from your mistakes is key (assuming you can recover from them). This is why I’ve long recommended curating filters to become a better investor. Every time you make a mistake investing it should become a new filter that helps you avoid making that same mistake all over again.
It’s a simple strategy, but very effective when applied over an entire lifetime. So simple that almost everyone misses it.
The world is so laser focused on success, maybe what it should really focus on is just avoiding major mistakes. Most people are so interested in “winning” that they miss the obvious inversion strategy of “not losing”.
Steer clear of the trouble spots for a lifetime and your bound to do pretty well. Life is hard enough as it is. Don’t let the easy stuff trip you up.
[Image Credit: AP via Wired, Flickr2]
I like this post very much.
I’ve always said that my biggest financial mistake was marrying the wrong person. Took me around two decades to financially recover and get back to where my happily married peers are.
Thanks Frogdancer. That’s a difficult mistake to recover from. Glad you got back on your feet again!
Our emotional desitions can be our worst enemies, glad to hear that you recover and learn from that lesson. I’m not married and I will not do it unless I find a person that understands life on a similar level that myself.
Even with a world of perils out there, our greatest enemy is ourselves. If you can just avoid the major missteps you identify above (and most of them are well within our control), you’ll probably have a pretty good life. Nice post!
Thanks Paul! 🙂
Great article and a good overview of investors’ basic mistakes.
Ideally, we should learn from our mistakes. And your suggested strategy of filtering sounds like a good way to go about it. But what if we just can’t seem to learn after many attempts? Then we should either quit what we are doing or find a way around our mistakes.
Assume there exists an investor who no matter what keeps making mistakes in the stock market. She tries and tries but keeps making the same mistakes. In that case, she can choose to quit cold turkey, and you got to respect that choice. But her other option is to automate her investments and remove herself from the equation.
Learning from your mistakes is key. But learning to accept our limitations – and working around them – is as important if not more so.
I suppose some people are not capable of learning from mistakes. That’s a terrible shame, but it’s reality I guess.
I’m just checking the comments to see if anyone writes about the Tesla investment.
Seems like nobody was interested. 😉
Your post today really hit home for me.
I have to say, over the years my husband and I have made some truly boneheaded decisions, but living beneath our means truly saved us.
When we moved to SC were really moving up career wise. Rick got his first engineering job and we set about buying a house. Because we chose to homeschool our son, we knew we had to rely on one income and even though it was much more money than we had been living on, we bit down on our desires and bought a home for a lot less than the bank and realtor thought we should spend. Fast forward two years and Rick started having some odd health issues. 3 years later, just after he was fully vested, he became permanently and totally disabled. Literally, he went to work in the morning and 2 hours later he was completely blind. 3 months after that, he was wheelchair bound.
This is no joke. Everyone thinks it can’t happen to them, but I am here to tell you, yes it can. If we had listened to the siren song of the world, we would have been homeless.
We will never be “rich,” but we will be just fine. I will be forever grateful to have found my people in the FIRE community.
Wow, what a powerful story Raine! Thank you so much for sharing it! It’s these little stories that I hear from people like yourself that keep me writing!
I have made some major mistakes in my life with the most egregious being my arranged marriage and subsequent divorce. That mistake by itself has cost me 7 figures of net worth easily.
Fortunately some of the other mistakes like being pushed into a front load mutual fund by a “financial advisor” involved relatively small amounts of money (about $6k which at the time as a resident was big).
Nowadays I am happy to play a more safe route and not go for home runs but rather prefer reliable singles and doubles.
Yep, probably safer that way! Sorry to hear about all your unfortunate mistakes. Seem’s like you’ve made great progress towards rectifying them! 😉
Great article. Thanks for information to chew on for a while. I had been thinking along these same lines today. Then I found Raine’s post. It really does pay off to mostly “avoid the big blunders” and not worry so much about being the biggest winner. Spending less than you make will get you through many bad situations, and more the longer you do it. This information has helped me make some choices I had today. I didn’t choose the least expensive option, as I have done in the past. I am choosing the option that has the best potential outcome, because I have options today. Thank you for the post.
You’re welcome TJ! Best of luck to you! 🙂
This is a nice post, Mr Tako.
I agree with the concept and your list. Let me add another one:
Harboring a negative attitude- this can come from jealousy, resentment over perceived unfair treatment or being angry at an institution or particular group. Getting stuck in a cycle of repeated negativity really makes for a miserable life. You literally make yourself miserable.
Surprisingly, many people stay in that place for far longer than they need to. I guess it’s just part of life.
-Mike
Oh yes, that’s a perfect example of a mistake that’s obviously bad news but many of us do it anyway.
Mastering our emotions may be one of the most difficult things to do in life!
Thanks for the nice comment Mike!
These seem sensible Mr Tako and thanks for the reminder to work to avoid mistakes as an aspiration. I think its fair to also say that they will happen to us all. I’m making one right now because I drank tea past 4pm and am now up insanely late from the caffine reading other blogs. Mistakes are for learning. Compassion and forgiveness are for mistakes that others make. May we all minimize mistakes, leave them in the past which is no longer changeable and then work toward the future which is always an opportunity
Beautifully said LOTM! 🙂
So true Tako, one huge mistake can be far more costly than many smaller ones. I’m very fortunate that, financially at least, I never made a huge mistake. Now in other parts of life it’s a different story…
Yikes! I’m almost afraid to ask, what happened?
Eh, stuff I shouldn’t go into. Perhaps they’ll become posts one day 😉
Mr. Tako,
This post is pure gold. Dang, what an important concept that so many of us miss. Nominating this one for Rockstar.
Thank you Laurie! 😀
Those may seem obvious now, but they probably weren’t when we were young.
That’s why I think it’s best to start investing as early as you can. You gain a lot of experience by making stupid mistakes when you’re young. That’s how I learn best, anyway. Investing is trickier than life especially when you don’t have a good guide.
Actually, I think I’ve done the exact opposite of what you suggest. I made fewer mistakes when I was younger. Once I got experience, I got bolder and made bigger mistakes. When I was young I was much more cautious than I am now.
But your right, it’s super important to start investing early! More time means more compounding!
Can you give an example of your ideas for “Optimize for the common case”. I get the other two you mention but not sure exactly what you mean by Optimize for the common case? Appreciate all the information it is really helpful for those like me starting out on this journey.
Oh, I figured everyone new about that one. Basically it means optimize your life for the activities you do 90% of the time. Building efficiencies in that case will have the most financial impact.
Mostly this means going to work, commuting, eating lunch, commuting, and then making dinner at home. This is what you do with 90% of your life, so make that common case *super efficient*. Walk to work, pack your own lunch, learn how to make super efficient meals at home. And so on.
The other 10% you can’t really control, so don’t try to optimize for it. Optimize for the common case.
Great post Mr. Tako. Yes many of these mistakes may seem trivial to some of us know but I bet when we started investing we probably made some of these mistakes too. Live and learn right?
Yep, exactly why I suggest everyone should create filters after making a mistake. Nothing like keeping a permanent record that says, “Don’t do this stupid thing again.”
Unfortunately human memories are pretty short and faulty… hence the need for a good filtering system.
Very valid points, Mr. Tako!
Currently I’m reading “The Richest Man in Babylon” (it’s a shame I haven’t read it before) and in one passage Arkad is sharing some words of wisdom by saying “The truth is always simple”. And it’s absolutely true for all areas of life! Avoiding big mistakes is a simple and profound concept and yet many people fail at it.
Last month at The Daily Journal annual meeting, Charlie Munger was asked about the secret of a long and happy life. “It’s easy, because it’s so simple”, the 95-year-old replied.
“You don’t have a lot of envy.
You don’t have a lot of resentment.
You don’t overspend your income.
You stay cheerful in spite of your troubles.
You deal with reliable people.
And you do what you’re supposed to do.
And all these simple rules work so well to make your life better. And they’re so trite.
If it’s trite, it’s right”
-SF
Like Frogdancer, I married the wrong person, and it cost me quite literally. Luckily, the divorce was amicable and my finances didn’t take a big hit (minus the $3,000 for my lawyer — ouch). But in terms of what I could have saved without his spending… Well, there’s nothing to do now but try to make up for lost time. And be more careful about who I choose as my next partner.
Hi Mr. Tako,
I have to say that from your non-investment list I have serious issues with eating poorly and exercises.
For the investment mistakes: I invested in high fee funds when I was 18-19 y.o (immature); Chased yield on my 28 y.o (lack of knowledge and greed); Investing in industries undergoing rapid change (currently doing it on SKT).
As you mention at the end of the post, the important thing is always to learn from the mistakes done in the past and, if possible, try to decrease the amount and the size of those.
All the best.
Cheers!